Ropes & Gray's podcast series, IP(DC), focuses
on developments in intellectual property law from the vantage point
of Ropes & Gray's office on Pennsylvania Avenue in
Washington, D.C.

The Trump Administration has targeted U.S. drug prices through a
number of as yet unsuccessful cost control schemes—with the
promise of more to come. At the same time, Congress is looking to
restore patenting options for some technical areas such as medical
diagnostics, while combating patent "ever-greening" for
blockbuster drugs and treatments. Given this storm of legal issues,
this IP(DC) podcast tackles the Administration's
confusing efforts to reign in drug pricing to date, while touching
upon competing policies at play on the patent side of the business.
In this episode, health care partner Tom Bulleit joins IP partners
Scott McKeown and Matt Rizzolo.

Transcript:

Scott McKeown: Welcome to the IP(DC)
podcast, a podcast covering recent D.C.-based developments in
intellectual property law. I'm Scott McKeown, chair of Ropes
& Gray's Patent Trial and Appeal Board practice. And I am
joined, as always, by my partner, Matt Rizzolo, an IP litigator in
Ropes & Gray's IP litigation group based here in D.C.
We've got an interesting show for you today that goes a bit
beyond your run-of-the-mill patent-focused developments. Today,
we'll explore both the business end and intellectual property
aspects of biopharma.

Matt Rizzolo: Did you know that prescription
drug prices were too high? Well, if you didn't, you haven't
been listening to President Trump. A few years ago, then-candidate
Trump told us that pharmaceutical companies were "getting away
with murder," and he promised to take action if elected. Our
partner, Tom Bulleit, who heads the health care practice in our
D.C. office, is also the leader of our working group on drug
pricing, and has been closely following initiatives by the
administration, Congress, and the states that are looking at
bringing down drug prices. We're very fortunate to be joined by
him today. Tom, can you give us an overview of what's going on
in this area?

Tom Bulleit: Thanks, Matt. All of this really
kicked off in 2018, although candidate Trump went so far as to
support the controversial idea of direct government price
negotiation with manufacturers, the administration's 2017
health policy efforts were devoted mostly to the ultimately
unsuccessful effort to repeal the Affordable Care Act. But in 2018,
the administration stepped up its game, first with a Rose Garden
presentation of their "American Patients First" strategy,
called the Blueprint, to curb prescription drug prices. The
Blueprint sets four priorities that have spurred various
administration initiatives over the past year: improve competition,
improve negotiation with drug makers, incentivize lower prices, and
reduce out-of-pocket costs. The FY 2020 budget that the
administration released Monday, March 11 also contains several of
these ideas. And since then, the administration has released a
flurry of final and proposed regulations that I'll get
into.

Scott McKeown: Tom, so what exactly has the
administration been doing to further these proposals?

Tom Bulleit: Well, I'll start with
improving competition and improving negotiation with drug makers.
First, you need to understand that there are several structural
impediments to affecting drug prices with either of these. The
first is that drugs covered under Medicare, either administered in
physician offices under Medicare Part B, or acquired from
pharmacies under Medicare Part D, have statutory protections that
prevent forcing doctors or patients to choose cheaper drugs. Part B
essentially covers anything a doctor thinks is medically necessary,
and pays according to a statutory formula that almost all the time
gives doctors a 6% markup – so as a rule, they have no
incentive to choose cheaper drugs. And although Part D plans
negotiate prices with drug makers, they're required to cover
all of the drugs in six protected classes – without getting
technical, these are drugs that treat HIV, mental illness, cancer,
epilepsy, and those who've had organ transplants. That really
ties the hands of plans trying to get lower prices because they
can't exclude similar drugs just because they're
expensive.

Matt Rizzolo: Given that the Trump
Administration is stuck with these coverage requirements, what has
it done so far to target drug prices?

Tom Bulleit: Well, effectively, what the
administration has tried to do is tinker around the edges. In May,
they published a final rule called "Modernizing Part D and
Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket
Expenses." This allows Part D and Medicare Advantage plans to
use step therapy and prior authorization for new starts of the
protected categories, except HIV drugs; outside the protected
classes, to exclude biosimilar products in the same way they can
exclude drugs that have a generic equivalent. But it did not
include the more impactful proposal of allowing Part D plans to
exclude protected class drugs if the price increased beyond a
certain threshold. Then in June, they announced that they were
withdrawing a proposed rule that would have prohibited rebates,
that's after the fact discounts, to health plans and pharmacy
benefit managers. And it also would've created a new safe
harbor for rebates that are passed through to beneficiaries at the
point of sale. This was after the Congressional Budget Office
showed that was not saving any money overall, and actually costing
taxpayers about $177 billion over the next ten years. Then
recently, they announced that a major health care overhaul will be
announced in the fall. That will include the proposal for
international reference pricing, which would tie Medicare Part B
spending on drugs to amounts paid in foreign countries, which are
generally lower. Some in Congress, and the White House is being coy
on their position, want to apply that principle to Medicare Part D
as well. That is something that could be really impactful, but
Senate Finance Chairman Grassley is skeptical of this, and it's
doubtful that it could be done by rule as opposed to by act of
Congress. So while it's a big idea, it's a long way from
having any effect.

FDA's taken some steps to try and improve competition from
generics, issuing lists of drugs that could be subject to generic
competition, and issuing guidance to make it easier for generic
makers to force brand makers to provide the sample needed to
reverse engineer the generic. And recently, Secretary of HHS Azar
has bowed to the President's insistence that FDA authorize
re-importation of drugs from Canada, though that is still in the
rulemaking process. But FDA's actions likely will have only
modest effects on drugs prices. It's unlikely that the Canadian
government will allow the relatively small amount of prescription
drugs sold to Canadian pharmacies to be diverted to the U.S.
market. And there's no special reason to think that drug makers
will increase the amount they sell to Canada to make up the
difference. Also, the FDA approval process is only one aspect of
whether a potential manufacturer of generics or biosimilars would
view the market as profitable. More radical steps, such as finding
a way to penalize drug companies for so-called pay-for-delay
arrangements are contained in bills that Congress is currently
considering, and in the President's budget, but it's
doubtful that there is sufficient bipartisan consensus to enact the
stronger measures.

Scott McKeown: Tom, let me ask you a little bit
about the interaction with the Canadian market. Let's assume
that the President is able to get some kind of legislation or rule
in place that would open up the Canadian market. Would that not
encourage gray market or black market goods?

Tom Bulleit: Yes, that's a really good
point, Scott. One would think that it probably would, but that, of
course, would undermine the premise of re-importation, which is
that the drug supply chain in Canada is safe. So it's probably
not in anybody's interests to have a system that encourages
gray or black market importation, rather than importation that
comes through the correct drug supply chain.

Scott McKeown: Just following up on that, so
what has been going on to encourage lower list prices and to reduce
out-of-pocket costs for patients?

Tom Bulleit: Well, the administration's
early tactics in encouraging lower prices are best described as
price shaming, calling out publicly the drug companies that raise
their prices. The President prevailed on some drug companies to
avoid any mid-year increases in 2018, but most of those companies
raised their prices at the beginning of 2019. The administration
issued a final regulation to require direct to consumer ads to show
the list price of Medicare and Medicaid covered drugs, and Johnson
& Johnson recently announced that it would begin to do so. The
administration seemed to think that by limiting this rule to drugs
covered by Medicare, the administration could avoid the compelled
speech, First Amendment concerns that drug makers raised about
being required to put prices in their ads. And indeed, they did in
a way – the lawsuit by pharma got the rule vacated in the
trial court based on the conclusion that CMS's authority to
issue regulations for the "efficient administration of federal
health care programs," simply didn't give the Agency
regulatory authority over this issue at all. Even if the rule were
to go into effect, there's little reason to think that this
kind of soft pressure would lead drug makers to conclude that they
should change their business models. And with the withdrawal of the
proposed regulation creating a new safe harbor for pass-through
rebates, the administration really has nothing going on that's
likely to advance the Blueprint's fourth priority of reducing
out-of-pocket costs. There has been some talk of adding the
pass-through rebate to a Senate bill, and that may stand some
chance of enactment.

Matt Rizzolo: So you anticipated my next
question: what has Congress done, if anything, that would have an
effect on prescription drug prices?

Tom Bulleit: Well, in two words, nothing much,
although there's been a lot of talk. The most interesting
proposal, and one that may stand some chance of enactment in the
fall, is called the "Bipartisan Prescription Drug Pricing
Reduction Act," that the Senate Finance Committee reported out
on July the 25th. Although it's opposed by pharma, the White
House has endorsed it, and Chairman Grassley has been touting this
an alternative that should be palatable to conservatives.
Meanwhile, Speaker Pelosi continues to negotiate a more radical
bill with the White House, and one that reportedly would
incorporate the international reference pricing proposal that the
White House is considering for Medicare Part B, and some have
speculated Medicare Part D as well. Because only the PDPRA, in my
view, is likely to have enough Republican votes to get past the
Senate, and it may not, it's worth mentioning a few of its
provisions.

The CBO estimates it would cut Medicare expenditures by $85
billion and Medicaid by $15 billion over ten years, and would save
beneficiaries $27 billion in out-of-pocket costs, so that's
something. Most impactful, the bill would require rebates to
Medicare for any Part B drug whose list price increased above the
rate of inflation, as measured by the CPI-Urban. The bill would
also increase the number of drugs for which price reporting to
Medicare is required. It would include drug company consumer
coupons as price reductions, and it would narrow the definition of
bona fide service fees that don't have to be treated as price
reductions in reporting.

There are also some wonkier provisions, and the effect of all
that is that the average sales price, or ASP, which is the basis on
which Medicare pays for Part B drugs, should move downward, though
by how much is a real question. And the flipside, of course, is
that it encourages higher list prices to mute the impact.

The bill would also make a major change to the Part D benefit.
Currently, this benefit has a deductible phase (consumers are
out-of-pocket), an initial coverage phase (the beneficiary pays
25%), a coverage gap, which people call the donut hole (this year
that's roughly out-of-pocket expenditures of $3,800 to $8,100,
and in that donut hole the generic manufacturer pays 63%, the
beneficiary pays 37% for generics, and brand manufacturers pay 70%,
the beneficiary pays 25%, and the plan pays 5%), and a catastrophic
phase (where Medicare pays 80%). The bill would cap out-of-pocket
spending for consumers, eliminate the donut hole, and transfer
brand name manufacturer liability for costs in the donut hole phase
to the catastrophic phase. As with Part B, manufacturers would also
have to pay a rebate to Medicare for price increases above the
CPI-Urban.

There are a bunch of things that the bill would do for Medicaid
as well, including increasing the maximum rebate that manufacturers
have to pay, eliminate the pricing benefit that manufacturers
currently get for having an authorized generic, and eliminate the
ability of a pharmacy benefit manager to pocket any difference
between the price it pays for the drug and the amount it pays the
pharmacy. And in the area of price shaming, the bill would adopt
the strategy adopted by many states which, in the last couple of
years, have enacted laws to require drug makers to post their price
increases, and in some cases a justification for the price
increases.

Scott McKeown: Some other activity on the Hill
recently, also designed to impact drug pricing, and we mentioned
this on our last podcast, but there's been
the Term Act, for example, which we discussed very briefly last
time. This legislation is intended to combat what some have termed
"evergreening," which is the concept where drug companies
obtain multiple patents on the same drug in order to extent patent
protection and prevent generics from entering the market. Most
notably, the Term Act would impose significant restrictions, but
just on the biopharma industry – it would not touch other
types of patents. In short, what the Term Act would do is flip the
presumption of validity for many biopharma patents and force a
disclaimer of those patents that would extend the monopoly beyond
that first patent in time on a key drug.

We also mentioned earlier that drug pricing can be a bipartisan
issue, and the We Paid Act is an example of that. It was introduced
by Chris Van Hollen of Maryland and Rick Scott of Florida, and
would require companies that have received research funding from
NIH and other agencies for drug-related patents to follow specific
pricing restrictions for the drugs they are selling that are
covered by those patents. The authors anticipate that 20% to 25% of
drugs would be impacted after enactment, although this would not
have retroactive effect for drugs currently on the market. And then
there's also H.R. 3391, which is the Affordable Prescriptions
for Patients Through Improvements to Patent Litigation Act, which
is quite a mouthful. That legislation would look to simplify the
so-called patent dance for biosimilar patents created under the
Biologics Price Competition and Innovation Act, or BPCIA. While the
BPCIA was intended to create a streamlined assertion process, like
what was done for Hatch-Waxman, many have found it to be
ineffective and over complicated. Others, however, think that
it's too early to tell.

Matt Rizzolo: So a lot of people say that D.C.
is very sleepy in the summer, but that's an awful lot of
activity. On top of all that, we even saw an op-ed from theNew York Times
last month that called for the "seizing of patents," by
the federal government, through a couple of different methods.
First, through an eminent domain-like statute, 28 U.S.C. 1498,
which effectively allows the government, or anyone with the
government's permission, to get a compulsory license at a rate
of "reasonable compensation." Some may recall that this
provision was much discussed in the wake of the anthrax scares of
the early-2000s, where many were worried about a shortage in the
drug Cipro, or price gouging, that Cipro was made by Bayer, and the
government used 1498 as leverage to get price concessions. The
Times also in this op-ed called for the government to look
at using so-called march-in rights, which is something the
government has never done before. March-in rights, at a high-level,
come into play where a federal government agency has provided the
research funding that led to a patented invention, and they allow
the funding agency either on its own initiative or at the request
of a third party, to march-in, ignore the exclusivity of the patent
owner, and grant additional licenses to other reasonable
applicants. Here, conceivably, in the pharma context, that would be
a low-cost generic.

Scott McKeown: And finally, as we discussed
last episode, there's also an effort underway to redefine the
law of patent subject matter eligibility – we have not seen
that re-worked bill as of yet. Finally, last month, the Stronger
Patents Act was reintroduced – this was a bill that's
been introduced four or five times now to no effect. This may be
more in the way of political theater to try to get big tech in line
with the 101 effort, but that effort is playing out. But let me go
back to you, Tom. I'll go back to you for the last word. Do you
have any ultimate takeaways for us on the pricing issue?

Tom Bulleit: Well, probably the shortest
takeaway is that almost nothing that's happened so far is
likely to move the needle appreciably on drug prices or on drug
out-of-pocket costs. The really big ideas that would be impactful,
direct negotiation of federal health care programs with
manufacturers, mandatory international reference pricing for all
federal health care programs, are just unlikely to happen.
There's no political support on the Republican side for direct
negotiation, and precious little for international reference
pricing. If the administration tries to impose international
reference pricing by regulation, it'll get stuck in litigation,
which I suspect will ultimately be successful in stopping it as
outside CMS's demonstration authority, and small-scale
demonstrations won't have any great effect. The PDPRA could
have some impact, especially the increased rebates for price
increases that exceed the rate of inflation, but that won't
reduce prices, it'll just limit future price increases. The
out-of-pocket maximum for a restructured Part B would help with
what beneficiaries have to pay at the pharmacy, and that would be
helpful to consumers.

Everything else, frankly, is little more than rearranging the
furniture. Just a few examples:

The proposed rule to eliminate Part D rebates to plans and allow
pass-through rebates to consumers would dramatically reorganize the
drug supply chain to the disadvantage of pharmacy benefit managers,
but there's no reason to think that it will lead to lower list
prices. It might reduce out-of-pocket drug costs, but at the
expense of higher premiums for those Part D plans. And there's
no certainty that drug makers would seek to implement those
pass-through rebates.

Step therapy and prior authorization will improve the ability of
Part D plans to steer patients to lower-cost drugs, but as long as
there are protected classes that must be covered, the effects are
likely to be marginal.

Transparency of price increases and price shaming haven't
shown any effect yet – I see no reason to think that they
will.

In sum, the administration's creating a new environment
where there will be lots of work for trade and professional
associations, lobbyists, lawyers. Consumers might see some modest
relief on point of sale cost sharing, though potentially at the
expense of higher premiums. But substantially lowering drug prices,
I wouldn't hold my breath.

Scott McKeown: So the saga continues. Thanks to
you both for joining me, it'll certainly be interesting to see
how this all shakes out in the fall and beyond. That's all the
time we have for today's episode, and we hope that you're
able to tune in on future episodes where we continue to discuss IP
developments from the Washington D.C. perspective. So on behalf of
Tom Bulleit, Matt Rizzolo, and Scott McKeown of Ropes & Gray,
thank you for listening.

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